Taxation of Life Insurance Policyholders in Australia and Eight Proposals for Taxation Law Reform

Abstract

This thesis explores the taxation of life insurance policyholders in Australia. Taxation laws originally addressed circumstances involving a conventional life insurance policy that was used as an economic equivalent to superannuation for retirement funding, a form of deferred remuneration from an employer, or upon death of the life insured. Australian taxation legislation in relation to a life insurance policy changed in the 1980s, and again in 2007. These new laws appear to have ignored the structure of a more modern life insurance policy that only provides a benefit where a contingent event occurs, such as death, terminal illness, total and permanent disablement, or traumatic medical condition, or income replacement due to illness, disease or injury. Now, a life insurance benefit may be characterised under the taxation laws as a: fringe benefit, capital receipt, income according to ordinary concepts, superannuation payment, employment termination payment, or compensation payment. This research investigates the characterisation of a life insurance policy benefit, and a life insurance premium payment, where the policy is owned in one of the three most common structures, in order to ascertain any differences in financial outcomes for beneficiaries and policyholders. The research employs mixed methods: qualitative legal comparative analysis of current taxation law as it relates to a life insurance policy, and quantitative simulation analysis in relation to hypothetical individuals. The empirical evidence demonstrates that the differing methods of taxation associated with life insurance policy ownership structures – owned by the life insured; owned by an employer under a contractual arrangement with an employee; and owned by a trustee of a superannuation fund on behalf of a member – create quite different financial outcomes for beneficiaries, including entitlements to taxation transfer payments such as the Disability Support Pension. This thesis proposes an alternative method of taxing life insurance policyholders and their beneficiaries. Eight areas for reform in relation to the taxation of life insurance policies in Australia are identified, including: premium rebates, separate taxation of life insurance benefits paid from superannuation, and separate taxation of life insurance benefits paid to employees. The law in this dissertation is at January 2019.